5 City Real Estate Opportunities No Investor Should Ignore

Real Estate markets in cities across the United States have had a rocky few years. The combination of downtown overbuilding and the economic recession was a one-two punch that drove property values down and increased uncertainty in the major cities. As we head into the dog days of summer, there are strong signs that many cities have started to emerge from their dog markets and present a viable, and in many cases a very strong, investment opportunity.

There are industry-wide influences, of course. Prices are at very reasonable levels in most cities and interest rates are at or near historic lows. If rates increase, the same property will cost you quite a bit more. A good rule of thumb is for each 1% increase, there is a 10-15% loss in purchasing power for the buyer. It’s likely that over the next few years, rates will rise 2-3% back to historical norms and buying power will drop rapidly. For many investors, this means that the time to buy is now when prices and rates are low and buyers have power.

Rising rents in many cities have outpaced ownership expense, making a purchase more cost efficient than renting and also increasing the likelihood of strong rental income and a cash flow positive opportunity. Additionally, strong foreign investment in several top US cities, buoyed by stronger foreign currency, the continued security of American investment, and the cache of a US address, provide built-in demand for city properties.

We at CondoDomain.com are big believers in city real estate in general, but I highlight 5 cities where I believe the current opportunity is especially strong. My opinions are based on a combination of data, our agent experiences and client sentiment. This is not a scientific study but hopefully sparks some thought and adds some value. If you have any questions in general or about specific cities or opportunities, please comment or reach out to me. Without further adieu, here is the list:

5 – Los Angeles, CA

There are strong signs that the real estate market in LA has hit bottom and is starting to rebound. Downtown LA was hit hard with a huge amount of overbuilding and some of the worst economic and housing downturns in the country when the credit crisis hit. Jobs and the economy have begun to come back and the oversupply of condo homes downtown makes it a buyers market.

While downtown housing is still partially depressed, the neighborhood has become a vibrant and hip social scene in Los Angeles. Housing will catch up. Additionally, the new Expo line for the Metro Light Rail will make commuting for work and fun much easier. Phase 1 (from downtown to Culver City) will be open within a couple of months and Phase 2 (from Century City to Santa Monica) will be finished in a couple of years. This is the first time anything like this has connected to the west side, a huge development for LA’s car-attached culture. The train will run above ground and the route will be landscaped with bike paths and greenery. The city already has forward-looking loft/condo projects cropping up in anticipation.

With downright low prices available and good prospects for the future, Los Angeles is my first investment market to watch.

4 – San Francisco, CA

A second California city takes our number 4 spot. San Francisco has remained fairly strong even through the downturn and is bouncing back well too. Starting off there simply isn’t any more room to develop on the peninsula, and there is always going to be a strong demand for premium housing in downtown SF. This point is driven home by the fact that the city’s effective rents rose 1.2% (according to the Wall Street Journal 7/7/11), a figure near tops in the country. Mercer Management Consulting ranks the city as having the highest quality of life in the continental U.S., and the region is the gateway to the Pacific Rim. This means foreign nationals will be players in addition to domestic buyers.

Continuing, there continues to be huge venture capital money invested in the area (more than $6.3 billion just during the recession). Job growth is on the rise, lead by high tech and life sciences professions. Overall unemployment has improved a full percentage point in the last year AND job growth in the high income/skill sectors is among the best in the nation.

Remember that we are talking about the city of San Francisco only in this recommendation, and not the whole Bay Area. Strong business investment, high-end job growth, international players and high demand/low supply mean an opportunity worth taking a hard look at in my book.

3 – New York, NY

The New York City Real Estate market is unique – almost a living and breathing organism like the city itself. Prices are high, demand is strong, and supply is limited… at least that’s been the story for some time now. Even in the early recession, the city’s housing market stayed relatively strong, but pressure built and finally forced a moderate price decrease in some areas. The city is expensive overall, but there are pockets of opportunity. The premium neighborhoods like Central Park West, the West Village and SoHo remain pricey and sought after, but even within those there are some streets and buildings where the investment opportunity is strong. Then there are neighborhoods like the Financial District where tax abatements and other subsidies make for strong opportunity across the area.

Rents in NYC are increasing fast as inventory becomes more and more scarce. Combined with the buying opportunities that can be found, this should lead to some strong cash flow situations for investors. Landlords in the city no longer pay any broker fees in almost all cases, a sign that renting property at the high market prices is relatively easy these days… and it’s a money saver for investors. Finally, strong foreign investment from all over the world continues across New York City.

So my summary on NYC: pockets of great opportunity combined with what should be high demand going forward and great cash flow opportunities.

2 – Miami, FL

Miami is more than just a vacation spot. It is the gateway to the United States for all of Central and South America and it has become a major financial hub in our country and for the world. Foreign buyers are a force in the city and promise to continue to be so. The soft dollar increases their buying power and the Miami address brings big-time cache, convenience and business opportunity.

The massive overbuilding in the late 2000s hammered condo prices in South Beach and especially Downtown Miami. While prices have hit bottom and are now starting back on the rise, there are still lots of very strong opportunities. The city has invested significantly in the Downtown / Brickell area and the neighborhood is looking good with outstanding public spaces and resident resources. Restaurants, bars and shopping have all recently flocked to the area.

It doesn’t hurt investor prospects that Florida has no personal income tax and a low (5%) corporate income tax. So – low prices, great amenities, favorable taxes and a massive foreign demand? Yes, that’s good enough for number 2 on my cities to watch list.

1 – Washington, DC

The pulse of Washington, DC is politics, as we all know, and this same government sector also powers the local Real Estate market. With the Federal government in town and all the lobbying and legal work associated with the public sector, the District of Columbia has one of the lowest unemployment rates in the country. In addition, the city has a highly mobile population that turns over frequently. DC has one of the highest migration rates from other states, and there is a strong foreign component too. There is always a high demand from buyers and renters alike.

Unlike the other cities on this list, property values in most of DC have been on the rise for a couple years now, without becoming excessive. It is cheaper to buy in DC than to rent and it’s a city with one of the largest rent-buy discrepancies in the country.

Inventory is scarce in Washington, DC. The economy is strong and stable and demand promises to be consistent. Our experience is that listings are selling fast and for at-or-near list price, and the aggregate data backs us up on this. I expect all these positive trends to continue and grade DC as my top investment city to watch.

Hoyt David Morgan is the President of CondoDomain.com, a web-based real estate broker that is hyper-focused on city markets and fanatical about its premium service. Hoyt can be reached at hoyt@condodomain.com.

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